Governments spend money irresponsibly when they don’t care much whether the wellbeing outcomes for New Zealanders justify the amount being spent.

This is happening on a grand scale. That is the conclusion of a wide ranging review of the evidence that was published last week by The New Zealand Initiative.

The report, Fit for Purpose? Are Kiwis getting the government they pay for?, was written by the author of this article. NZ Initiative executive director Oliver Hartwich wrote the foreword.

Reports by the New Zealand Productivity Commission have identified the key aspect of the malaise. It is that government agencies are not rewarded for focusing on outcomes relative to resources spent. So they largely do not. Aspects of productivity that could be measured may not be. Aspects that are measured tend to be neglected.

In a nutshell, what is difficult to achieve and is not being measured is unlikely to be achieved. Productivity in government is difficult to achieve.

A headline finding in the report was from a 2013 report for the Canadian think tank, the Fraser Institute.  Its author, Lakehead University economist, Professor Livio di Matteo, compared wellbeing outcomes to government spending across 33 member countries of the OECD.

He found that South Koreans were getting the best outcomes relative to spending. Most were falling well short of this benchmark. So was New Zealand. On South Korea’s performance, it could achieve similar wellbeing outcomes to those in New Zealand by spending one-third less.

Government spending for New Zealand on his measure is running at around 40% of GDP. This is the most-cited OECD measure. It encompasses all central and local government current spending plus some net capital spending.

One third of 40% of GDP is around 13%. Thirteen percent of GDP today is a big number.  It represents around $20,000 per household annually. That represents around twice what the average household is spending annually on food.

To be clear, this is not a measure of spending that is being literally wasted. Instead, it measures spending that appears to be ineffectual from an overall community viewpoint. It might benefit someone’s wellbeing at an equal cost to someone else’s. Indicatively, New Zealand governments could spend that much less without impairing overall community wellbeing if they could spend as well as South Korea.

The report sees such assessments as primarily motivational. They provoke questions they do not answer. They do not show what New Zealand would need to change. They make no case that the implied changes are feasible. They do not even explore whether the relatively good outcomes for South Korea are due to favourable non-spending considerations.

Their contribution lies instead in identifying countries that appear to be doing better. There is value in that. We should not be too proud to learn from the best performers.

Some might dismiss the South Korea benchmark on the basis that it does not have the large welfare states that abound in Europe and afflict Anglo Saxon countries. They have a point.

It is unthinkable that government in New Zealand could adopt South Korea’s more limited state welfare system. As things stand, New Zealand could not speedily cut spending on, say, health, education, or welfare including New Zealand Superannuation by 13% of GDP and expect to see anything other than an unacceptable fall in wellbeing for those affected.

The point to reflect on instead is why the wellbeing outcomes for South Korea are much higher than in New Zealand when its welfare spending is much less. After all, it is hard to think of any group that is happy with the outcomes from state welfare in New Zealand. They are pretty dire for somewhere between 10% and 20% of the population.

Around 15% of New Zealanders by age 18 have been brought to the attention of the authorities by age 18 for abuse or neglect reasons. Too many households have unsafe family structures.

Around 17% at age 15 lack basic numeracy and literacy. These youths have limited prospects for achieving their potential in life.

Worse, this is a self-replenishing intergenerational pipeline. Its flow maintains the reservoir of adult misery, at a great cost to taxpayers and its victims.

Of course, the above proportions who are abused and near-illiterate will never be zero. But surely they are far too high.

Public debate would be better informed if officials told us what could be said about the corresponding statistics for the successful Asian countries, such as South Korea, Hong Kong, Singapore, Taiwan and Japan.

We can’t learn from others if we do not study them. Would a study show that their family structures are more traditional and safer on the whole? If so, why the difference?

It matters if taxes are too high because ineffectual spending is too high. (The report shows that taxation in New Zealand takes a higher proportion of national income (approaching 33% for central and local government combined) than in almost any relatively prosperous country with a sizeable population. It was much smaller before we grew the proportion of the working-age population on welfare benefits to the 10% figure it has averaged during the last five years.

It matters because taxes have hidden community welfare costs. They arise because people alter their behaviour to avoid paying taxes on the one hand or to make themselves eligible for a government spending programme on the other.

The incentive to do so is greater the larger the tax rate. For some welfare beneficiaries, this is close to 100% of an extra dollar they might have chosen to earn by paid work.

When people reduce their working hours to avoid tax, they lose something they would have otherwise benefited from and so do those who would have bought the product of their labour. The combined loss is a welfare cost.

Wellington-based economists John Creedy and Penny Mok estimated the welfare costs in New of raising an additional tax dollar. They calculated that additional cost to the community ranged from “about 5 cents for single men to over six dollars for low-income single parents”. For the total population the marginal welfare cost was 12 cents in the dollar. 

They caution that these results are specific to the model they used and the nature of the posited tax change. So they are illustrative rather than definitive.

Why the big differences?  The data is telling us that people’s responsiveness to tax rate changes depends on their situation, for example, their income situation in the household. Single men tend to be in full-time jobs. They tend to stay in them if there is a small increase in tax rates. The community welfare loss is small, even if their loss is large. People in part-time or casual jobs tend to find it easier to reduce hours worked or drop out of the labour force altogether. So women’s hours in paid work might respond more on average than men’s to a change in hours worked. Would-be buyers of the forgone community production lose, too. The result is a greater community welfare loss.

In short, redistributive government spending, which is what most government spending is today, is not benign. It reduces community welfare unless it provides a demonstrable offsetting community benefit. Sadly, the existence of one is evidently not important to governments.

The report quotes the Productivity Commission’s finding that “[t]here is little regard and systematic review of the value for money from existing expenditure”. That tells us that the governments of the day have not required them to do so.

So should we just blame the politicians? The report argues that this would be too facile. General election campaigns have become a demeaning lolly scramble of irresponsible spending promises. That is the electorate’s doing, not the politicians’.

Deeper thinking is needed and more public awareness of the problem of inadequate attention to value for money. The Initiative’s report is a contribution to that cause.